Home Stock Market Granite: The Finest Performing REIT (NYSE:GRP.U)

Granite: The Finest Performing REIT (NYSE:GRP.U)

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Granite Actual Property Funding Belief (NYSE:GRP.U) is dual-listed (TSX & NYSE). All figures within the article are in CAD until famous in any other case.

The last time we wrote on Granite REIT, we highlighted that the REIT had plenty of strengths. We had been nonetheless unsure of shorter-term gyrations because the market was within the throws of the lockdown. We left with the particular message.

“Buyers shopping for right here shall be very completely satisfied 10 years down the road, though we can’t assure that they are going to be completely satisfied in 10 days.”

Supply: Granite REIT: Rock Solid

Since then, the inventory has moved up considerably. The REIT additionally did one other fairness providing lately. That providing took the value down a tad. We analyze the place the corporate stands put up the fairness issuance and whether or not it makes a purchase to your portfolio.

The Firm

Granite is an industrial REIT which has properties internationally in 8 totally different nations.

Supply: Granite Investor Presentation

On final replace, it had 108 properties making up a forty five million sq. ft portfolio. North America makes up greater than half of the properties when truthful values are taken into consideration.

Supply: Granite Investor Presentation

Tenants

Granite had one main drawback when it went public as a REIT. The overwhelming majority of its income was coming from a single tenant, Magna Worldwide Inc. (NYSE:MGA) and its subsidiaries. In actual fact, in December 2011, MGA was occupying an eye-popping 94% of its leasable space. We’ve got seen that REITs with an enormous focus of tenant threat can transform troublesome investments. We noticed that with each CorEnergy Infrastructure Belief Inc. (CORR) and Uniti Group Inc. (UNIT).

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However Granite had one factor going for it that neither UNIT nor CORR did. Its major tenant was about pretty much as good as you may get. MGA continued paying its hire on time month after month and Granite continued diversifying. It offered a couple of MGA properties and bought a couple of high quality property yr after yr. The web result’s that MGA has now been whittled all the way down to 30% of its leasable space.

Supply: Granite Investor Presentation

What can be notable right here is {that a} good portion of its prime 10 have sturdy credit score scores. Whereas MGA has been lowered to a few third of its former presence, it’s nonetheless an important portion. We recently examined MGA’s financials and we had been extraordinarily impressed. For sure, we do not see any fallout threat, regardless of one of many worst years for automotive gross sales.

Valuation

Granite is one of the best performing REIT on the TSX and has demolished its counterparts.

Supply: Canadian REITs

That record simply exhibits you the highest 8. The underside 8 appears like this.

Supply: Canadian REITs

So, Granite has completely dominated the business nevertheless you have a look at it. Behind that is Granite’s sector alternative. Buyers should have observed that the highest embrace all defensive sectors like Industrial Property REITs, Condo REITs or Medical Workplace Constructing REITs. Industrial property have truly benefitted from the pandemic as e-commerce has skyrocketed. This has elevated property values and rents.

This efficiency, although, leaves Granite at a slightly costly valuation. Granite reported adjusted funds from operations (AFFO) of $52.7 million or $0.91 per unit, within the third quarter of 2020. That places it at greater than 20X AFFO multiples.

On a worth to ebook worth, Granite is reasonably costly and trades at a 20% premium to the truthful worth of its properties.

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One level we wish to observe right here is that buyers can solely use worth to ebook values as comparatives among the many Canadian REITs. That’s as a result of Canada makes use of IFRS and properties are marked to truthful values. Buyers ought to by no means evaluate worth to ebook values between Canadian and US REITs. US GAAP makes ebook values subsequent to ineffective for REITs.

Getting again to Granite, the REIT is at a minimal pretty priced and maybe a tad costly, even for its recession resilient properties.

Weighted Common Lease Expiration, or WALT

Granite has a WALT of 5.9 years with simply 1.7% coming for renewal in 2021. Within the present local weather, that is greater than ample for industrial properties.

Supply: Granite Investor Presentation

Curiosity Protection

Whereas most REITs are pleased with a 3X curiosity protection, Granite boasts a 7.5X protection.

Supply: Granite Investor Presentation

Granite makes use of much less debt than all different Canadian REITs and there is normally no comparability. Granite’s leverage has creeped up a bit over the previous couple of years because it has seen the worth in issuing accretive fairness together with low price debt. Again in early 2018, its curiosity protection ratio bordered on 10X.

Supply: Granite Investor Presentation-2018

This isn’t a priority basically for this REIT, as the largest grievance buyers had about Granite was that it was not utilizing enough leverage. Present numbers are stellar and about proper for Granite.

Distributions

Granite’s sub-4% yield is among the lowest on the TSX.

Supply: Canadian REITs

Exterior of Condo REITs, most REITs usually pay the next distribution. However Granite’s regular progress signifies that it could possibly proceed to hike its payout.

“On November 4, 2020, the Belief elevated its focused annualized distribution by 3.4% to $3.00 ($0.25 cents per thirty days) per stapled unit from $2.90 per stapled unit to be efficient upon the declaration of the distribution in respect of the month of December 2020 and payable in mid-January 2021.”

Supply: Granite Q3-2020 press release

Based mostly on all the knowledge, Granite thus enjoys the very best dividend security score on our proprietary Kenny Loggins Scale, even on this local weather.

A low score implies a lower than 15% chance of a lower within the subsequent 12 months.

Conclusion

Granite has delivered and delivered in spades. Even south of the border it had demolished all REITs which can be thought of extraordinarily dependable like Realty Revenue (O) and W.P. Carey (WPC). It’s combating a heated battle with Prologis, Inc. (PLD) for prime spot at present.

ChartKnowledge by YCharts

Whereas the previous has been unbelievable, the REIT is kind of costly. That could be a perform of its sector (industrial) and its relative lack of leverage. We predict the corporate can return 6-7% a yr from right here. Key threat can be a rise in cap charges of business properties as issues normalize. If truthful values fall a tiny quantity and Granite trades again close to NAV, the REIT might drop 30%. Based mostly on the info, we give this a impartial score.

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Please observe that this isn’t monetary recommendation. It might appear to be it, sound prefer it, however surprisingly, it isn’t. Buyers are anticipated to do their very own due diligence and seek the advice of with knowledgeable who is aware of their targets and constraints.

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Disclosure: I/now we have no positions in any shares talked about, and no plans to provoke any positions throughout the subsequent 72 hours. I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (apart from from Looking for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.